National Bureau of Economic Research

About: National Bureau of Economic Research is a nonprofit organization based out in Cambridge, Massachusetts, United States. It is known for research contribution in the topics: Monetary policy & Population. The organization has 2626 authors who have published 34177 publications receiving 2818124 citations. The organization is also known as: NBER & The National Bureau of Economic Research.

Market Potential, Increasing Returns, and Geographic Concentration

Abstract: In this paper, I examine the relationship between increasing returns to scale and the geographic concentration of economic activity. Using data on U.S. counties, I estimate the structural parameters of the Krugman (1991) model of economic geography. The specification I use, which is derived from the equilibrium conditions of the model, resembles a spatial labor demand function as it is proximity to consumer markets tha determines nominal wages and employment in a given location. Parameter estimates show support for small but significant scale economies; the estimated price-marginal cost ratio is 1.1 in 1980 and 1.2 in 1990. The parameter estimatines also suggest that geographic concentration is a stable feature of the spatial distribution of economic activity. As a prelude to the analysis, I estimate a reduced form of the Krugman model which approximates Harris' (1954) market-potential function. The estimation results show how far demand linkages extend across space and how shocks to income in one location affect wages and employment in other locations. Demand linkages between regions are strong and growing over time, but limited in geographic scope. Simulations based on parameter estimates suggest that a 10% fall in personal income for a region the size of Illinois reduces employment by 6.0-6.4% in counties that are 100 km in distance, with effects declining to zero for counties more than 800 km in distance. The results are consistent with a high volume of trade within cities and between proximate cities.

An EBIT-Based Model of Dynamic Capital Structure

Abstract: Much of the literature on optimal capital structure has taken the unlevered firm value to be the underlying state variable, even though the unlevered firm ceases to exist after a capital structure change occurs. This approach has been a source of confusion, leading to conflicting views on the relationship between the levered and unlevered firm value at the moment of a capital structure change. Moreover, these frameworks imply that the role of government is to create a 'tax benefit' cash-flow into a firm, when in practice much of the cash that flows out of a firm is typically paid to government via taxes. To circumvent these difficulties, we take the claim to future EBIT as the underlying state variable, and assume that it is invariant to changes in capital structure. In such a framework, all claims to EBIT (equity, debt, government) are treated in a consistent fashion. In particular, the government claim is correctly modeled as an outflow of EBIT via taxes, rather than as an inflow of 'tax benefits'. This distinction dramatically affects the payout ratio, which in turn affects both the probability of bankruptcy and predicted yield spreads. In addition, the invariance feature of the state variable makes this framework ideal for investigating optimal dynamic capital structure strategy. When firms are permitted to increase their level of outstanding debt in the future, predicted leverage ratios are consistent with those observed.

Aid, Policies, and Growth: Comment

Abstract: In an extraordinarily influential paper, Craig Burnside and David Dollar (2000, p. 847) find that “... aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies but has little effect in the presence of poor policies.” This finding has enormous policy implications. The Burnside and Dollar (2000, henceforth BD) result provides a role and strategy for foreign aid. If aid stimulates growth only in countries with good policies, this suggests that (1) aid can promote economic growth, and (2) it is crucial that foreign aid be distributed selectively to countries that have adopted sound policies. International aid agencies, public policy makers, and the press quickly recognized the importance of the BD findings. This paper reassesses the links between aid, policy, and growth using more data. The BD data end in 1993. We reconstruct the BD database from original sources and thus (1) add additional countries and observations to the BD data set because new information has become available since they conducted their analyses, and (2) extend the data through 1997. Thus, using the BD methodology, we reexamine whether aid influences growth in the presence of good policies. Given our focus on retesting BD, we do not summarize the vast pre-BD literature on aid and growth. We just note that there was a long and inconclusive literature that was hampered by limited data availability, debates about the mechanisms through which aid would affect growth, and disagreements over econometric specification (see Gustav F. Papanek, 1972; Robert Cassen, 1986; Paul Mosley et al., 1987; Peter Boone, 1994, 1996; and Henrik Hansen and Finn Tarp’s 2000 review). Since BD found that aid boosts growth in good policy environments, there have been a number of other papers reacting to their results, including Paul Collier and Jan Dehn (2001), CarlJohan Dalgaard and Hansen (2001), Patrick Guillaumont and Lisa Chauvet (2001), Hansen and Tarp (2001), Robert Lensink and Howard White (2001), and Collier and Dollar (2002). These papers conduct useful variations and extensions (some of which had already figured in the pre-BD literature), such as introducing additional control variables, using nonlinear specifications, etc. Some of these papers confirm the message that aid only works in a good policy environment, while others drive out the aid policy interaction term with other variables. This literature has the usual limitations of choosing a specification without clear guidance from theory, which often means there are more plausible specifications than there are data points in the sample. We differentiate our paper from these others by NOT deviating from the BD specification. Thus, we do not test the robustness of the results to an unlimited number of variations, but instead maintain the BD methodology. This paper conducts a very simple robustness check by adding new data that were unavailable to BD. Thus, we expand the sample used over their time period and extend the data from 1993 to 1997. * Easterly: Department of Economics, New York University, 269 Mercer Street, New York, NY 10003, Center for Global Development, and National Bureau of Economic Research (e-mail: william.easterly@nyu.edu); Levine: Department of Finance, Carlson School of Management, University of Minnesota, 321 19th Avenue South, Minneapolis, MN 55455, and National Bureau of Economic Research (e-mail: rlevine@csom.umn.edu); Roodman: Center for Global Development, 1776 Massachusetts Avenue NW, Washington, DC 20036 (e-mail: droodman@cgdev.org). We are grateful to Craig Burnside for supplying data and assisting in the reconstruction of previous results, without holding him responsible in any way for the work in this paper. Thanks also to Francis Ng and Prarthna Dayal for generous assistance with updating the Sachs-Warner openness variable, and to three anonymous referees, Craig Burnside, and Henrik Hansen for helpful comments. 1 See, for instance, the World Bank (1994, 2001, 2002), the U.K. Department for International Development (2000), President George W. Bush’s speech (March 16, 2002), the announcement by the White House on creating the Millennium Challenge Corporation (White House, 2002), as well as a Washington Post editorial (February 9, 2002), a Financial Times column by Alan Beattie (March 11, 2002), and The Economist (March 16, 2002).

The Value of Life and the Rise in Health Spending

Abstract: Over the past half century, Americans spent a rising share of total economic resources on health and enjoyed substantially longer lives as a result. Debate on health policy often focuses on limiting the growth of health spending. We investigate an issue central to this debate: Is the growth of health spending a rational response to changing economic conditions—notably the growth of income per person? We develop a model based on standard economic assumptions and argue that this is indeed the case. Standard preferences— of the kind used widely in economics to study consumption, asset pricing, and labor supply—imply that health spending is a superior good with an income elasticity well above one. As people get richer and consumption rises, the marginal utility of consumption falls rapidly. Spending on health to extend life allows individuals to purchase additional periods of utility. The marginal utility of life extension does not decline. As a result, the optimal composition of total spending shifts toward health, and the health share grows along with income. In projections based on the quantitative analysis of our model, the optimal health share of spending seems likely to exceed 30 percent by the middle of the century.

Liquidity and Expected Returns: Lessons From Emerging Markets

Abstract: Given the cross-sectional and temporal variation in their liquidity, emerging equity markets provide an ideal setting to examine the impact of liquidity on expected returns. Our main liquidity measure is a transformation of the proportion of zero daily firm returns, averaged over the month. We find that it significantly predicts future returns, whereas alternative measures such as turnover do not. Consistent with liquidity being a priced factor, unexpected liquidity shocks are positively correlated with contemporaneous return shocks and negatively correlated with shocks to the dividend yield. We consider a simple asset-pricing model with liquidity and the market portfolio as risk factors and transaction costs that are proportional to liquidity. The model differentiates between integrated and segmented countries and time periods. Our results suggest that local market liquidity is an important driver of expected returns in emerging markets, and that the liberalization process has not fully eliminated its impact.